The global carbon market dipped 1.4 per cent to $142 billion last year from $144 billion in 2009, as greenhouse gas emissions rose in the hottest year on record and the global economy stabilised, the World Bank said.

The stall in growth was mostly due to uncertainty about market rules after the Kyoto Protocol expires in 2012, the bank said on Wednesday in a report published at a carbon conference in Barcelona, Spain.

The value of carbon offsets generated under the protocol's primary Clean Development Mechanism (CDM) market saw the biggest slump, falling by almost half to around $1.5 billion from $2.7 billion the previous year - its lowest level since the pact came into force in 2005.

'If the CDM stays at $1.5 billion we simply will not be in the business because that amount of money is just not enough (to fight climate change),' said Andrew Steer, the bank's special envoy for climate change.

The CDM rewards companies for investing in clean energy projects, mainly in developing countries. Investors are worried that offsets will be invalid if Kyoto is not extended or if there is a gap between old and new market mechanisms.

UN climate talks aimed at securing a Kyoto successor have agreed on modest steps to combat climate change but have so far failed to commit to legally binding CO2 cuts.

Apart from regulatory uncertainty, the CDM market declined on lower emissions output due to the economic downturn, as well as an EU ban on certain types of offsets from 2013 and competition from other, cheaper UN credits, the report said.

The bank expects demand for all Kyoto credits, which represent 1 to 2 per cent of the overall market, to be 136 million over the next two years.

'However, I don't believe the overall market will decline (further) in the next two years,' Alex Kossoy, senior finance specialist at the bank's carbon finance unit, told Reuters.

Investors are increasingly looking towards more predictable asset classes, such as a UN-backed forest preservation scheme called REDD, whose market share swelled last year, with 16.7 million credits transacted, compared to 2.8 million in 2009.

Both the sovereign Kyoto Protocol emissions rights (AAU) market and the United States' northeastern carbon market shrank last year to a combined value of $1.1 billion from $4.3 billion the year before, the report said.

The voluntary OTC market's value rose 10 per cent to $393.5 million last year, as activity increased, but volumes still accounted for just 0.3 per cent of the global market.

The European Union's Emissions Trading Scheme (EU ETS), continued to dominate the global market with its value inching up by 1 per cent to $119.8 billion last year from $118.5 in 2009, the World Bank said.

EU carbon permit transactions represented 84 per cent of the total value of the global market, even though an ongoing probe into value-added tax fraud and spot permit theft led to the loss of confidence and liquidity in the spot market.

'The market is bowed but certainly not beaten,' said Henry Derwent, president of the International Emissions Trading Association (IETA), which released a separate survey on market sentiment on Wednesday.

The IETA report, conducted by PriceWaterhouse Coopers, showed that confidence in the market is still low but many participants expect traded volumes to be up from 2012-2020.

Survey respondents said EU prices need to reach 60 to 81 euros a tonne to incentivise investment to reduce European emissions by 80 per cent by 2050. Analysts see prices averaging around 30 euros over the period 2013-2020.-Reuters